Higher Minimum Wage Leads Many Firms to Shutter, but New Ones Take Their Place

Raising the state minimum wage didn’t have much effect on fast-food employment in California, Illinois or New Jersey in the 2000s. But it did lead to change: a spike in restaurants exiting the market after wages rose, while a bunch of new restaurants moved in.

Bloomberg News

“We show that small net employment changes in the restaurant industry may hide a significant amount of firm level churning that arises in response to a minimum wage hike,” wrote Daniel Aaronson, Eric French and Isaac Sorkin in a recent working paper from the Federal Reserve Bank of Chicago. “In particular, increases in the minimum wage induce greater firm exit, a result consistent with many existing models. However, more surprising, we find a simultaneous and roughly offsetting increase in firm entry.”

The minimum wage is a hot topic among policymakers these days. President Barack Obama has called for Congress to raise the federal minimum wage from $7.25 to $10.10 an hour. But many Republicans oppose the proposal, saying it would discourage employers from hiring low-wage workers.

Mr. Aaronson and Mr. French, both economists at the Chicago Fed, and Mr. Sorkin, a graduate student at the University of Michigan, studied employment trends in three states that raised their minimum wages between 2001 and 2006: California, Illinois and New Jersey. They focused on fast-food restaurants, a large employer of low-wage workers.

“Across all three states, we find little evidence of an economically notable net employment response to a minimum wage change,” they wrote.

But they did find considerable churn as restaurants opened and closed. In all three states, “exit rates are roughly 4 to 7 percentage points higher than they would be absent such an increase.” But in New Jersey and Illinois, though not California, “entry rises by an additional 3 to 4 percent and this corresponds to employment levels that roughly counteract the job loss due to exit.”

The analysis “introduces the possibility that inflexible incumbents are replaced by potential entrants who can optimize on input mix,” they concluded.

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